MENA Economic Outlook October 2016

MENA: MENA: OPEC deal promises to bolster oil prices

October 5, 2016

Economic activity in the Middle East and North Africa (MENA) appears to have bottomed out in the second quarter following Q1’s dismal performance, which drove growth to decelerate to levels last seen in the trough of the financial crisis in 2009. GDP expanded an aggregate 2.1% year-on-year in Q2, which marked an improvement over Q1’s 1.9% growth. Taking a closer look at the region’s economies individually, oil-importing economies led the acceleration on the back of strong domestic demand in Israel due to the Central Bank’s ultra-loose monetary policy and solid gains in the labor market. Growth in Tunisia accelerated due to resilient manufacturing output, while activity in Morocco decelerated as a harsh drought hit agricultural output.

Dynamics among oil-export-driven countries deteriorated in Q2. The uptick in oil prices in that quarter, coupled with stronger production in some countries, was not enough to make up for the losses accumulated since oil prices started to fall in the second half of 2014. Ballooning fiscal deficits led to the introduction of severe austerity measures in some countries, while financial conditions tightened as most governments decided to tap their domestic markets to finance their fiscal gaps. This situation, at different scales and intensity, hit economic activity in both the private and the public sectors.

In an attempt to prop up oil prices and rekindle growth among battered oil-export-driven economies, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary deal to cut oil production on the sidelines of an energy conference held on 26–28 September in Algeria. The accord, which marks the first time OPEC has decided to trim production in eight years, includes the reduction of OPEC’s aggregated oil output from around 33.2 million barrels per day (mbpd) in August to a range of between 32.5–33.0 mbpd. However, oil prices failed to rally significantly following the announcement as there are still some hurdles to overcome. The absence of guidelines on specific country quotas and mechanisms to ensure that all parties stick to the deal threaten to derail the final agreement, which is scheduled for 30 November. Other factors will likely play an important role during the negotiations, including whether or not Russia participates in the accord; the expected ramp-up in oil production in Libya and Nigeria following severe supply disruptions; and the ongoing mistrust between the two regional powers Iran and Saudi Arabia.

MENA's 2016 forecast remains stable for third consecutive month

Analysts have adopted a wait-and-see approach this month as the positive impact of the preliminary oil deal in September has been overshadowed by doubts about its implementation. Similarly, signs that global monetary conditions will remain accommodative for the foreseeable future, combined with more stable oil prices, were offset by geopolitical risks and harsh fiscal consolidation processes in the region. As risks to MENA’s economic outlook appear to be broadly balanced, our panel of analysts maintained their growth forecasts for the region stable for the third month in a row at 2.3%. For 2017, growth in the region is expected to accelerate to 2.8%.

The stable outlook for this month’s 2016 MENA growth forecast reflects upgrades to the forecasts for 9 of the 16 economies in the region, including Egypt, Iran and Israel, but downgrades for Qatar, Saudi Arabia, Tunisia and Yemen. The panel left their projections for Jordan, Lebanon and the United Arab Emirates unchanged.

Iran, which is benefiting from its reintegration into the global economy, and the relatively-diversified Qatari economy are expected to be the first and second best performers in 2016, respectively. At the other end of the spectrum, Lebanon and Saudi Arabia are expected to perform poorly, and Yemen, which is entangled in a never-ending civil war, will be the worst performer by far. Of the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.3% and 2.7%, respectively.

Economic growth decelerated further in Q2 on the back of still-low oil prices and higher credit costs for private businesses, stemming from tightening domestic liquidity due to the government’s large fiscal financing needs. GDP expanded 1.4% annually in Q2, which was down from the 1.5% growth in Q1. In an attempt to rein in the government’s large fiscal deficit, the Cabinet announced on 26 September the Kingdom’s first ever public sector wage cuts. These measures will likely weigh on growth as nearly two-thirds of Saudis are employed in the public sector. On 26–28 September, the OPEC reached a preliminary deal to cut oil production. Although all-important details such as the country quotas have yet to be agreed, a reduction in oil supply could boost oil prices and provide some relief for Saudi Arabia’s large twin deficits.

While September’s oil deal could prop up oil prices and support growth, prices will remain at low levels for the foreseeable future and the government will likely implement further austerity to curb its budget deficit. Nevertheless, the Kingdom’s massive international reserves shield it against any sharp economic downturn. FocusEconomics panelists forecast that GDP will rise 1.0% in 2016, which is down 0.1 percentage points from last month's projection. In 2017, the panel sees GDP growth accelerating to 1.3%.

UAE | Fall in revenues continue to weigh on growth

The UAE has proven fairly resilient to the recent economic headwinds triggered by low oil prices and weak global demand, due to its relatively diversified economy compared to that of neighboring Gulf countries. However, GDP growth is slowing down and lower oil revenues have strained public finances, increasing the need for a tight fiscal adjustment. The UAE has made major cuts in transfers to Government-Related Entities (GRE) and it implemented a new subsidy reform early in 2016, but its budget deficit is expected to increase further this year. On the external sector side, the current account is expected to continue narrowing but to remain positive thanks to healthy non-oil exports.

Large-scale investments in the run-up to Expo 2020 are expected to start materializing this year and will help to continue diversifying the economy. However, even if the latest OPEC agreement to curb production spurs oil prices, this will not necessarily be enough to boost the government’s strapped finances. FocusEconomics panelists expect that GDP will rise 2.4% in 2016, which is unchanged from last month's projection. In 2017, the panel sees GDP growth accelerating to 2.6%.

EGYPT | Further pound devaluation on the cards

The Egyptian government continues to tout its economic plan to staunch the spiraling budget deficit and to restore balance to a faltering currency market, beset by a dollar shortage and a widening disparity between the official and black market rates. The economic plan comprises short- and medium-term measures, including the long-awaited introduction of a Value-Added Tax and cuts to energy subsidies and government wages. Egyptian officials have also repeatedly hinted at a further devaluation of the Egyptian pound and an eventual floating of the currency, which has been hit by reduced tourist dollars and soaring inflation. The number of tourists almost halved in FY 2015/2016, which has also caused the current account to swing into a deficit this year, according to the Central Bank’s latest data. The Egyptian government estimates that it needs up to USD 21.0 billion in funding for its economic plan, which will in part be covered by a USD 12.0 billion loan from the IMF.

The country’s incapacity to attract investment, an unstable political environment and weak domestic activity will drag on growth this year, despite the government’s push for reforms. Nonetheless, our panelists expect GDP to have expanded 3.3% in FY 2016, which is up 0.2 percentage points from last month’s forecast. Our panel sees growth of 3.6% in FY 2017.

ISRAEL | Bumpy start to Q3 following Q2’s strong growth

Israel’s second quarter growth was revised up to 4.0% in seasonally-adjusted annualized terms, from the 3.7% previously reported. According to the new numbers published by the Central Bureau of Statistics, private consumption grew at an impressive double-digit rate and government spending was also healthy, while the external sector dragged on the expansion, mainly due to surging imports. Imports have been buttressed by a favorable labor market and increased purchasing power, thanks to a relatively strong shekel. Since Q2, economic activity appears to have moderated slightly. In August, both business and consumer confidence edged down and although exports rebounded from their annual fall, they remain weak. Nonetheless, the healthy growth in H1 prompted the Central Bank to upgrade its growth forecast for this year.

Expansionary fiscal and monetary stimulus as well as low unemployment will continue to support growth this year. FocusEconomics panelists expect the economy to grow 2.7% in 2016, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel forecasts that GDP will expand 3.2%.

INFLATION | Upward trend in inflation continues in August

Inflation in the MENA region edged up from July’s 4.4% to 4.6% in August, which represented the highest reading since August 2015. The print mainly reflected higher inflation in Egypt and Iran. Inflation is spiraling in Egypt due to a combination of a sliding currency and rising administered prices. Elsewhere in the region, the removal of subsidies in the Gulf countries is also exerting upward pressure on inflation. However, weak regional activity and a low global inflation environment are still keeping inflationary pressures in the MENA region relatively contained overall. Going forward, the gradual increase in commodities prices will start to kick in.

FocusEconomics panelists decided to increase their 2016 inflation forecast for the MENA region by 0.1 percentage points to 4.8%. The upward revision mainly reflected higher inflation projections for Algeria, Egypt and Iran. In 2017, inflation is expected to increase to 5.1%.

The recent recovery in oil prices and still resilient domestic demand in many countries in the Middle East and North Africa (MENA) suggest that the region’s economy is emerging from rock bottom after recording the weakest rate of expansion in Q2 since the height of the financial crisis in 2009.

The economy of the Middle East and North Africa (MENA) region continued to expand at a moderate pace on diverging trends, with oil-producing countries feeling the effects of OPEC-dictated cuts and oil-importing economies benefiting from resilient domestic demand and improving global dynamics.